6 Financial Numbers That Steer Your Business

Monday 30 April, 2012

by Simon Allsop

Most business owners look only at their profit and loss statement - which is a bit like driving a car using only the rear-view mirror. While a profit and loss statement shows what the business has done, only a balance sheet will show what the business is facing in the future. Learn the numbers you need to keep your eye on - and why.

What are the magic numbers?

The six numbers you need to watch to steer your business come from your Balance Sheet as well as your Profit and Loss (P&L) statements.

Here are the numbers:

1. Days receivable
   
   How long is it taking you to get paid? Compare this to your terms, and work out how much more cash you would have in the bank if customers paid on time. How much difference would an improvement of just five days make to your available cash flow?
   
2. Net profit margin
   
   Your profit margin must be positive and it must be growing when you compare it to a prior period!
   
   Even in these tough economic times, most businesses' top lines are falling - but it's the bottom line that matters. Dynamic businesses are able to make a shift in their operations to ensure the Net Profit margin remains positive, and is slowly increasing over time.
   
3. Working capital ratio
   
   Otherwise known as the Current Ratio because it compares Current Assets to Current Liabilities. We encourage most of our clients to strive for a ratio of 2:1 even in tough times. Any more than this, and you're probably being too conservative with your capital. Any less than this, and you are running a fine line when the unexpected happens.
   
4. Break-even sales
   
   This figure is key to your survival and changes with every change you make to your overheads or Gross Profit margin. You need to know your break-even on a monthly, weekly, even daily basis to be able to set relevant targets for yourself and your employees. If you are selling a product, know how many units this is. If you are selling a service, know what value this is.
   
5. Gross margin
   
   This must remain consistent over time. A gradual decrease over time is usually because of one of two factors:
   
   
   1. Inflation is boosting your costs - But you haven't changed the price to your customers.
      
   2. Productivity levels have dropped - This may be due to utilisation if you are a service provider, or quality and quantity of product if you are a manufacturer.
   
   Either way, it is vital to your business that your gross margin remains at least constant over time.
   
6. Cash at bank
   
   In all cycles of the economy, cash is King. It is cash that pays your suppliers, pays your employees, and most importantly pays your dividends! Trade debtors, loans and equipment don't have the ability to pay you a return on your investment like cash does. Keeping a close watch on your cash balance is like checking the finished product of a well-oiled machine. 
    
    
   Source:ceoonline.com